Friday, August 24, 2007

Looks Like The Party Is Over (for a while)

House prices expected to slow to near standstill

Don't you just love Bank Holiday Weekends as you can get all sorts of 'bad news' (sic) stories out in the hope that they will all be forgotten about by Tuesday.

Posted by enuii @ 08:56 PM (1248 views)
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15 thoughts on “Looks Like The Party Is Over (for a while)

  • crash bandicoot says:

    Affordability constraints will take hold but prices will rise by 2-4%, how does that work? Since a two-bed terrace is already eight times your salary I’ll pop another ten grand on it to teach you a lesson? I thought the current prices were supported by good old supply and demand. Surley rising interest rates (and inflation) must dampen even the most ardent buyer’s demand.

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  • Same story trotted out ever couple of months thast next year there will be a “slowdown” and then it never happens and house price inflation goes over 10% again.

    These articles give you false hope.

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  • Dave’s back, we’ve missed you, have you been any where nice.

    Here’s some compound percentage calcs:-

    Average pay rises have been ~3.0% since 1997 (source Amicus) so 3%^10 = 134%

    Average House Price up 188% since 1997 (source Halifax) 6.5% P.A. average

    Obviously as borrowing costs fell and chinese stuff to put in your house got cheaper then borrowing’s rose to compensate.

    Now this has all changed, interest rates are rising and inflation and taxation are taking their toll so if Dave’s theory is right in another ten years an average house will cost your average joe in 1997 terms the following:-

    2017 House Price Using 6.5% average (not 10%) 6.5%^20 = 352% of 1997 Price
    2017 Wage Inflation Using 3.0% average 3.0%^20 = 180% of 1997 Price

    A Simple Illustration Dave that doesn’t use your 10% figure and it is still UNSUSTAINABLE.

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  • Blow! I knew I should have taken higher maths at school! I don’t suppose some nice, kind person can explain what enuii has done with 3% to turn it into 134% (idiot-proof explanation would be much appreciated!) I’ve learned so much from you guys, but I must admit a lot of the more technical stuff is still over my head.

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  • david20040_0 says:

    Your Maths are flawed and I will be proved right again.

    Last year in 2006, most newspaper predicted only a 3-4% rise, and now it’s 12%.

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  • “Richard Donnell, director of research at Hometrack, … is forecasting increases of just 1 to 2 per cent nationally next year.”

    If house prices average only rise by (say) 1.5% then I have a couple of questions:

    – The national average includes central London prices which are totally disconnected from normal market influences. Doesn’t this imply that some regions must be close to zero or below zero?

    – 1.5% does not cover inflation. Isn’t a 1.5% return on an asset a dreadful rate of return?

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  • Hi David,

    We do appreciate your input here…

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  • I think the posters can sometimes be hard on David. Whatever his real position/interest, he does have recent historical evidence on his side. House prices have nearly trebled over the last 10 years and until you see tangible evidence that prices are falling across the UK (especially the South East), it is difficult to gainsay the bulls. That said, it does strike me as remarkably odd that the average person/couple can buy a house based on the so-called average salary and house price. Here is a real example:

    I am renting a 3 bed Victorian semi in Horsham (not as grand as it sounds, more a cottage than a “house”).

    Rent=870. council tax=130, gas/elec/water=80, telephone (2 mobiles and landline)=100, fares into london=240, car costs=25, house insurance=20, food/drink=400 TOTAL/month= 1865. My rental costs me ~1800 per month before I even go out for a meal, take my son out etc. and excludes any additional costs such as loans/credit cards etc. Realistically, you will need a minimum of 2000/month net (~32k salary per year) to afford this rental.

    However, to buy this house would cost £320k + £12k costs (stamp duty, solicitor, removals)=£332k. Let us take 2 scenarios, 10% and 30% deposit. All costs above are the same, the only change will be the rent/mortgage differential. I have assumed the purchaser has paid the 12k costs separately.

    10% deposit = 32k 90% mortgage = £288k @ 5% (optimistic) interest only = £1200/month. So need £2300/month net to service this house (~40k salary per year) if you bought it. You would also have to earn £70k per year to keep at 4x salary!!!!

    30% deposit = 96k 70% mortgage = £224k @ 5% interest only = £933/month. Still £60/month more to buy with a 30% deposit on an artificially low IR and interest only. You would have to earn £55k per year to keep at 4x salary!!!

    It makes no commercial sense for me to buy this house, even if I had 30% of the purchase price, I would be paying more than my rent but not reducing mortgage. This example does not include credit cards, loans, holidays, days out etc., upkeep costs of the house.

    It is fair to say that most of the couples buying these houses in my street only have 1 salary (wife at home with kids), so they realistically would have to have (1) good deposit (>30%), (2) well above median salary (>50k) or (3) combination of both to afford a small house in Horsham (yet it is still dearer than renting!) Surely unsustainable! Are the good people of Horsham unusually wealthy (large cash deposits and earning well above median salaries) or they are outrageously maxed out? Surely it must be the last scenario since anybody earning a good salary (>50k) would surely want to live in something bigger than a box (these are the smallest family homes in Horsham). I will let you decide!!

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  • David

    BTL is the way for you to go David

    LOL

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  • SU

    Enui has basically compunded the 3% annual wage increases. This means that each additional 3% is 3% of the PREVIOUS years figure, rather than of the starting figure (meaning that it will be more than a 3% increase on the starting figure). As such, the 10 years of increases represent and overall increase of 34% (rather than 30% if each increase was from the starting point). This means that wages at the end of the period are 134% of those at the start. Hope this makes sense

    Where perhaps Enui could have been clearer (apologies if that sounds patronising btw, not meant as such), is that this means that the increase in wages has only actually been 34%, while the increase in house prices has been 187%. In other words, for each £1 increase in earnings, house prices have gone up by around £5.50. Clearly this is not sustainable.

    Getting back to the article, the question is what happens next. None of us have a crystal ball of course, and anyone who truly claims they know what will happen is imho a liar or a fool. This can be illustrated by the fact that there were people predicting a late 80s/early 90s style crash 5 years ago, and at the other extreme even now there are people claiming that hpi will average close to double digits in the coming years.

    My own “best guess” (and it is only that), is that the article has it about right based on current information. I believe (but could be wrong) that the boom is well and truly over, and probably would have been even without recent events in the credit markets. There have been good reasons for much of the increase in prices over recent years, but there would clearly come a point where that would end, and it now is, having probably overshot what is reasonable.

    The credit market issues have the potential to trigger a crash, but that potential is not yet being realised. As far as I see, the credit situation has the potential to go one of two ways. One is in effect as a giant wake up call to the system, where individual institutions get hit hard, but damage to the wider system is limited. In this scenario, there is a tightening of credit, but only in the sense of tightening to those individuals / organisations that should not have had credit (at the level given at least) in the first place. This would imho tighten conditions suffciciently to constrain future growth, but not enough to cause a crash.

    The second scenario is of course much more severe, and what many on this forum both expect and hope for. In this scenario, the excess of the last few years damage the system sufficiently that it is unable to function “normally”, with a massive credit crunch as positions entrench and people look to minimise risk. This situation snowballs over time, causing a crash not just in house prices, but much of the wider financial system.

    While the second scenario cannot be ruled out, the information currently available makes me (as a layman btw, and my opinions ae no more valid than anyone elses) believe that the first is far more likely. Stock markets seem to have stabilised, Central banks have intervened to address short term liquidity issues (and importantly have indicated a willingness to do whatever it takes to maintain this position), and things seem to be calming down somewhat.

    In this scenario, my opinion (nothing more) is that real house prices will fall significantly in the coming years, as incomes in effect catch up with prices. However, I think nominal prices (while possibly falling slightly) will broadly hold steady in most cases. Naturally, there may well be an “unexploded bomb” sitting somehwere in the credit market turmoil. If that is the case, and it goes off, the “doomsday scenario” may be much more likely

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  • semi-detached-from-reality says:

    David,
    could you please make up your mind if you want a crash to occur or not. The other week you were saying “I want a mega-crash” then later you played Devil’s Advocate stirring up all sorts of bad feelings and silly debates over pedantic little nothings, nit picking and the like whilst pretending to be on this side of the fence.

    You either want a crash or you are playing in the wrong sandpit matey.

    AND you sound suspiciously similar to Landlord Association (La La Land)

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  • sold 2 rent 1 says:

    David,
    “Last year in 2006, most newspaper predicted only a 3-4% rise, and now it’s 12%.”

    LSR (Lombard Street Research) predicted 15% for 2007.
    They are always the most accurate.

    Watch for Oct 1st for their quarterly update in The Telegraph of their “housing affordability index”.
    They will be predicting a crash either on Oct 1st for Jan 1st 2008.
    Have faith my son.

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  • sold 2 rent 1 says:

    Typo. Oct 1st OR Jan 1st 2008

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  • Su,

    This is probably a little late, as I’ve only logged on today, and this is yesterday’s story. Also, it is difficult to explain in a brief way, but here goes:

    To increase a number by 3%, you can mulitply it by 1.03 (in the same way, you can increase a number by 5% by multiplying it by 1.05, and 15% by multiplying it by 1.15).

    Hence, if a house was worth £100,000, then an increase of 3% can be calculated as £100,000 x 1.03 = £103,000.

    If the original price increased by 3% each year for, say 4 years, then this can be calculated as:

    £100,000 x 1.03 x 1.03 x 1.03 x 1.03 = £112,550.

    The repetition of 1.03 x 1.03 x 1.03 x 1.03 is mathematically expressed as 1.03 “to the power of” 4 (i.e. 1.03 multiplied by itself four times.) This is represented on a computer as 1.03 ^ 4. And 1.03 to the power of 4 is 1.12550881 (an increase of 12.55%). Hence, the above expression could be written as:

    £100,000 x 1.03 ^ 4 = £100,000 x 1.12550881 = £112,550 (and 88.1 pence, to be precise)

    Thus, Enuii’s increase of 3% over 10 years (shown by Enuii as 3%^10) is 1.03 ^ 10, which is roughly 1.34, which equates to an increase of 34%, or in other words, 134% of the original price. (I think Enuii was talking about salaries, but the mathematics is the same)

    Hope this makes sense.

    Maths lesson over.

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  • Thanks for the maths lesson. Really helpful, easy to understand calculations plus an explanation of that funny symbol ^.

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